Supervisory approach documents | Assessing risk | Information for smaller firms | Mitigating risk | Proactive intervention framework | Regulation of insurance
The Prudential Regulation Authority (PRA) is responsible for the prudential regulation of banks, building societies, credit unions, insurers and major investment firms. It aims through its supervision to develop a rounded, robust and comprehensive view of these firms, to judge whether they are being run in a safe and sound manner, and whether insurers are protecting policyholders appropriately.
Consistent with its focus on key risks to its statutory objectives, the PRA divides the firms it supervises into five categories of “potential impact”, and the frequency and intensity of supervision applied to firms varies in line with this. The scale of a firm’s potential impact depends on its size, complexity and interconnectedness with the rest of the financial system. For insurers, it also takes into account the size (including number of policyholders) and type of business undertaken.
The PRA also varies the resource it applies to firms based on their proximity to failure and resolvability, given the possible adverse effects of disorderly firm failure on its objectives. The PRA does not operate a zero-failure regime, but seeks to ensure that any firms that do fail do so in a way that avoids significant disruption to the supply of critical financial services. Judgements about a firm’s proximity to failure are captured within the PRA’s Proactive Intervention Framework, which is designed to ensure that the PRA identifies and responds to emerging risks at an early stage.
Under this approach, firms that are unlikely to have a significant impact on the PRA’s objectives on an individual basis, but which still have the potential to cause significant disruption collectively (for example, small credit unions or insurers), are supervised on a portfolio basis and examined individually only occasionally – for example where a risk has crystallised. By contrast, large, complex firms are subject to detailed supervision at an individual-firm level and will have a named supervisory contact.
Firm feedback: measuring the effectiveness of the PRA’s approach
The PRA proactively seeks input from firms on the effectiveness and quality of its supervisory framework and approach. This has been obtained through several means including an annual feedback survey. The 2014/15 survey was completed by 78 firms through a process overseen by the oversight function and chaired by senior advisors so that independence in maintained. Full results are available under Key Resources.